SEC’s proposed ABS regulations and their applicability to insurance-linked securities

The U.S. Securities and Exchange Commission (SEC) has been seeking to bring proposed rules into force regarding new shelf eligibility requirements for asset-backed securities (ABS). The proposed rules seek to enforce greater accountability and enhanced quality around ABS when an issuer uses a shelf registration process.
The rules to revise the regulatory regime for ABS were initially proposed in April 2010, then the Dodd-Frank Act came along and addressed a few of the SEC’s concerns. In light of Dodd-Frank and also comments received from the public, the SEC has revised the proposal leading them to issue a re-proposal on the 26th of July giving interested parties 60 days to comment.

“It is very important that we move forward with our new registration and reporting rules for the asset-backed securities market, but we also want to make sure we get it right,” said SEC Chairman Mary L. Schapiro. “This re-proposal will help us solicit the input and constructive comments we need to finalize this critically important project to protect investors in asset-backed securities.”

Securities regulation can be arcane in language and difficult to understand for all but the most knowledgeable experts in the sector. These important rule changes seek to address issues around collateral assets (brought on by issues with mortgage securitizations and the unknown risks found to lurk in pools of assets), certification of securitizations, risk retention and investor communications among other items. As such they are expected to be applied to certain, if not the majority of, insurance-linked securities such as catastrophe bonds.

Thankfully, leading law firm Cadwalader, Wickersham & Taft LLP have published a memo which comments on the rules within the proposal which are likely to affect insurance-linked securities and cat bonds the most. They say that proposed amendments to the rules relating to safe harbor of exempt offerings and resales for ‘structured finance products’ in reliance on Securities Act Rule 144A are particularly of note. Cadwalader say that they are uncertain how requirements for asset level disclosure would apply to, or be satisfied in, ILS and cat bond transactions which usually make use of U.S Treasury money market funds or repurchase agreements in their collateral arrangements.

Cadwalader highlight some of the SEC’s requests for comments which are most deserving of response from the ILS community. We encourage you to read their memo (which you can access here in PDF format) and also the full re-proposal from the SEC (which you can access here) and submit your comments if you have any concerns about the proposed rules as they stand.